Recent volatility across sharemarkets globally has been a stark reality check to investors just how quickly the mood and momentum in markets can change. It has also stoked fear that we may be on the verge of a major market correction.

This raises the question of what causes sharemarkets to crash and how investors can best prepare their portfolios.

As markets continue to rally, investors remain concerned about a major crash. Here’s how to prepare you and your portfolio.Credit: Dionne Gain

There are many common factors that can lead to a sharemarket crash:

Economic bubbles. When there is excessive optimism that leads to a sharemarket bubble​, which has the potential to burst and cause a market crash.

Speculation. Investors purchase stocks with the hope of them becoming more valuable in the future. This is often focused on a particular sector or industry. For example, the dotcom bubble focused on speculation of technology stocks, whereas the global financial crisis originated from the real estate sector.

Political uncertainty/tension. The sharemarket usually thrives when political ties and international relations are strong. Therefore, if there is any threat of political tension, war or terrorism, this can drive sharemarket prices down.

Excessive leverage. Trading on margin comes with many risks, and one of them is that when the markets drop, investors may be forced to exit their trade, which can lead to excess supply flowing back into the market, leading to a further........

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